Spear REIT Delivers Strong Q1 Performance Amid Vacancy Reduction

Spear REIT Limited (JSE: SEA) has released its voluntary operational and financial update for the first quarter ending on May 31, 2023, of the 2024 financial year. The update highlights the company’s performance in its core portfolio and its efforts to reduce vacancy rates.

Throughout Q1 FY24, Spear REIT exhibited improvements across its operating business, achieving a noteworthy reduction in portfolio vacancies by 1.02%. The vacancy rate decreased from 7.82% (32,034 m²) in the previous financial year to 6.80% (28,995 m²) in the current quarter. Spear REIT’s management attributes this contraction to the successful execution of letting and renewal strategies, an increase in demand for office space in the commercial portfolio, and sustained demand for space in its multi-let industrial parks.

Operational Highlights for Q1 FY24

Sectoral Update:

1. Industrial: Spear REIT’s industrial portfolio has maintained its robust performance during Q1 FY24, with consistent demand for industrial rental opportunities. Operational metrics within the industrial portfolio have shown considerable strength, with rental reversions printing a positive 10% for Q1, and in-force average escalations being the highest among all subsectors of the Spear portfolio, at 7.63%. The vacancy rate for Spear’s industrial portfolio has declined from 2.23% of the total portfolio GLA in FY23 to 1.50% in Q1 FY24.
2. Convenience Retail: Despite growing pressure on consumers due to rising living costs and high interest rates, Spear REIT’s convenience retail portfolio performed satisfactorily in Q1. The portfolio maintained historically high occupancy rates of 99.47%, generating stable cashflows. Although there was a marginal negative rental reversion, 41% of Spear’s retail portfolio by GLA is occupied by national tenants on long-dated leases with excellent payment records.
3. Commercial: Spear REIT’s commercial portfolio has shown early signs of vacancy contraction, which will positively impact the company from Q2 onwards. The return to office momentum has been maintained, although the hybrid work model remains popular. Increased letting activity in certain parts of the commercial portfolio has been encouraging, with office vacancies decreasing at various locations. The positive impact of the local and international business process outsourcing (BPO) sector on commercial office vacancy contraction in the Cape Metropole has been significant. Improved enquiry metrics have been observed as a result of strategic marketing initiatives.

Financial Highlights for Q1 FY24

Spear REIT’s balance sheet and income statement remain healthy, with receivables reducing in line with management’s forecast. Despite the challenging economic conditions in South Africa, the company has maintained consistent cash collections in Q1, ensuring sustainable cash flows across the portfolio throughout FY24.

Financial and Operational Outlook

Looking ahead, Spear REIT remains confident about the positive momentum achieved in reducing portfolio vacancy rates and generating improved revenue during Q1 FY24. The company’s portfolio-wide asset management initiatives, including positive rental reversion milestones and improved average in-force escalation rates, are expected to contribute to the ongoing financial and operational health of Spear throughout FY24.

Spear REIT’s specialization in the Western Cape region provides a level of insulation from real estate headwinds experienced in other parts of South Africa. The company is optimistic that this specialization, combined with its high-quality portfolio, will enable it to capitalize on growth opportunities in the Western Cape.

Despite the challenging trading conditions and the volatility in the South African macro-economic environment, Spear REIT remains committed to actively implementing asset management and property managementstrategies to mitigate the impact of cost creep and rising interest rates on its financial performance in FY24.

Spear REIT recognizes the commitment of the Western Cape provincial and municipal authorities to improve and invest in infrastructure in the region. The consistent population growth in the Western Cape, driven by semigration, further supports the company’s regional focus and provides a favorable outlook for its core portfolio metrics.

Operational Summary for Q1 FY24

The following table provides a summary of Spear REIT’s operational performance for the three months ending on May 31, 2023:

The table highlights the positive performance of Spear REIT’s industrial portfolio, with a significant reduction in vacancies, strong rental reversions, and the highest in-force average escalation rate among all subsectors. The convenience retail portfolio showcased stability, maintaining high occupancy rates despite market pressures. The commercial portfolio demonstrated early signs of vacancy contraction, with expectations of further improvements in the coming quarters.